Moody’s: Few Signs of Recovery in Demand for U.S. CRE

Multifamily the only sector showing improvement in latest quarter.

Excerpts from US CMBS: Red –Yellow — Green™ Update, Third Quarter 2009 Quarterly Assessment of U.S. Property Markets

Most commercial real estate markets in the U.S. continue to post weak fundamentals and are unlikely to see recoveries soon, according to Moody’s Investors Service latest Red-Yellow-Green® study. Measures of market strength, says Moody’s, are generally showing little movement.

Though Red-Yellow-Green® scores remained relatively unchanged, halting some steep declines experienced in recent quarters, Moody’s says it is premature to assume that markets have reached bottom. Marginal contractions in supply are behind most improvements in the supply-demand balance of some of the markets, says Moody’s.

There are few signs of a robust recovery in demand, a key condition for real improvement in market conditions assuming constant supply.

All of the seven sectors tracked by Red-Yellow-Green® posted market strength scores similar to those in the previous quarter, with the exception of the multifamily sector, which shifted upwards into green territory, buoyed by improvements in forecasted absorption rates.

Moody’s Red-Yellow-Green® report scores markets on a scale of 0 (weak) to 100 (strong) and describes them in traffic light colors, with scores of 0-33 identified as red, 34-66 as yellow, and 67 — 100 as green. The new third quarter study reflects data from the second quarter of 2009.

The multifamily sector returned to green territory after its score increased from 66 to 75. The improvement reflected projected absorption increasing to 0.8% from 0.2% as the supply pipeline contracted to 0.7% from 1.0%. This has led to a supply-demand imbalance changing into a situation where demand is outpacing supply.

The retail sector held steady at the record low score it reached the previous quarter of Yellow 46.

The score for offices in central business districts (CBDs) also remained unchanged at Yellow 42, reflecting trends similar to those in the retail sector.

Suburban offices remained flat as well, with a score of Red 27 for the second consecutive quarter.

The industrial sector shed an additional six points, falling from a score of Red 27 to Red 21.

The full-service and limited-service hotel sectors remained at Red 0.

Comments

[John Gault:]

Um, this just in... SLG says...net effective rents of ~$17, a 19% decline from 2Q and 48% below peak 2007 levels, reflecting high levels of TI and free rent.

What? No. Real Estate, dirt, they

Oct 28 01:10 AM

[John Gault:]

Apparently I've been censured. Congrats Reitbull and Tasker - you're right. Real estate is undervalued. Buy! Buy! Buy!

FO - out forever.

Oct 28 01:14 AM

[REITBull:]

Big deal, John. In 2007 their stock was trading around $120-$140. Today it's at $40. If you value their price based on an equity cap rate here is what you come up with:

10%- $38.50
9%- $50.00
8%- $64.00
7%- $83.00
6%- $107.00

And these rates are based on very conservative NOI. I'm not saying 6% cap rates are coming. But with a high-barrier to entry portfolio, SLG should be trading at 7% within the next 3 years. If you wait for Moody's to tell you it's a buy, it will be too late.


On Oct 28 01:14 AM John Gault wrote:

> Apparently I've been censured. Congrats Reitbull and Tasker - you're
> right. Real estate is undervalued. Buy! Buy! Buy!
>
> FO - out forever.

Oct 28 10:04 AM